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5 Reasons Why Emerging Market ETFs Will March Higher

In recent days, emerging markets have garnered a major position in the global investment space. As per a recent report in The Wall Street Journal, developing-world assets have been among the biggest winners so far in 2017. This is in contrast to the general belief that the emerging markets will suffer the maximum owing to the startling win of the Republican nominee Donald Trump as the U.S. president.

The MSCI Emerging Markets Index of stocks gained around 7% this year, more than double the gains of the S&P 500. Emerging markets are characterized bygrowing middle class people, the explosive rise of e-commerce and the expansion of financial services which are still underpenetrated. Strong global growth, low valuation of emerging market assets and rising commodity prices have made emerging market ETFs attractive bets.

Low Valuation of Emerging Market Assets

Over the last two years, emerging market stocks have been underperforming their developed market peers due to weak commodity prices and higher dollar prices. Moreover,Trump’s win has sent shockwaves across the emerging markets owing to his unpredictable nature coupled with his anti-trade policies and triggered a broad sell-off (read:Will Emerging Market ETFs Shine Again Under Trump Regime?).

According to a recent study by Institute of International Finance(IIF), measured by the P/E ratio, share-market valuations of developing countries are close to their lowest levels while valuations on developed markets are near their highest since 2008. This situation opens up significant capital gain potential for global investors. Importantly, emerging market bond ETFs provide portfolio diversification, because their returns are not closely correlated to traditional asset classes. Investors who are looking to offset the currency risk are likely to consider emerging market bonds issued in local currencies as a valuable hedging tool.

Cheaper Valuation of the U.S. Dollar

Accommodative developed market central banks, which have kept interest rates low for long, bolstered demand for higher-yielding emerging market securities (read: What Can Make EM ETFs a Winner in 2017?). Though the Fed is on the policy tightening mode, the rise in yields would likely be the highest in the short part of the yield curve, when the step will actually be taken this year. Benchmark 10-year U.S. Treasury yield will likely be less hurt.The U.S. dollar is currently down more than 1% year-to-date. This situation is extremely favorable for developing nations which have a high level of U.S. dollar denominated debt and commodity exports.

Strong Growth Potential

Economic growth is expected to rise in several emerging nations, supported by an easy monetary policy adopted by the central banks. Many emerging market central banks are cutting interest rates amid lower inflation. Emerging markets debt-to-GDP ratios remain well below that of developed markets. At present, emerging markets are well positioned to attract global investors’ attention by offering high yields with strong macroeconomic fundamentals (read:5 Reasons to Invest in Emerging Market Bond ETFs).

According to a report by OECD, the world economy is likely to grow 3.3% in 2017 and 3.6% in 2018. The US fiscal stimulus is expected to boost global GDP growth by around 0.1% in 2017 and 0.3% in 2018. Emerging market economies that typically produce and export commodities and basic goods would be less directly affected by expected higher trade barriers.

Rising Commodity Prices

Several emerging markets with significant commodity exposure have been benefiting from rising commodity prices supported by easy monetary policies, surge in demand and a reduction in supply glut. Most of the emerging markets are commodity-centric. While the commodity market has seen enough of bear days, 2017 has turned a new leaf for it.The prices of commodities like metals and sugar have risen and oil has stabilized above $50 a barrel. Big commodity producers like Russia and Brazil are benefiting from this scenario. Stabilization of commodity prices has helped reignite investors faith in emerging market with the improvement in the economic conditions in these countries.

Policy Reforms

To boost growth, several emerging economies have been resorting to policy easing via interest rate cuts or offering some accommodative measures. Among the set, China, India, Turkey, Russia and Indonesia deserve a mention. Many of the emerging economies are enacting pro-growth reforms as well. So, higher growth rates should offer investors both capital gains and solid yields.

In November 2016,the Indian government withdrew high-denomination banknotes – 500 rupee and 1000 rupee – in circulation, as part of a crackdown on illegal money, dealing a heavy blow to the finances of militants targeting India. While the cash ban is expected to be a drag on the Indian economy in the near term (say for at least two quarters), the long-term outlook is quite compelling.The government of India plans to boost infrastructure and open up industries such as railways and defense to foreign investment (read:Will Indian ETFs Shine Under the Trump Presidency?).

After months of tensed trading, the year of the Rooster seems to have started on a positive note with good news flowing from the Chinese territory. For long, the Chinese economy hit headlines for all wrong reasons, but the tables may now finally be turning.Exports from China jumped 7.9% year over year to $182.81 billion in January 2017, due to solid global demand, following a 6.2% decline in the prior month and breezing past expectations of a 3.3% rise. It was the fastest clip of annual growth since March 2016 (read:2017 Brings Luck for China ETFs: Will the Rally Last?).

ETFs in Focus

Below we highlight a few emerging markets ETFs that have performed well on a year-to-date basis (as of February 13, 2017).

iShares MSCI Emerging Markets ETF(EEM - Free Report) : This ETF replicates the price and yield performance of JP MORGAN GBI-EMG CORE INDEX. The fund manages an asset size of nearly $28,209.95 million and an average daily trading volume of 65,445,966 shares. The fund charges an expense ratio of 72 basis points (bps) a year. EEM is up 9.51% so far this year.

iShares Core MSCI Emerging Markets ETF(IEMG - Free Report) : This fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Emerging Markets Investable Market Index. The fund manages assets worth $22,313.33 million and an average daily trading volume of 7,527,177 shares. The fund charges an expense ratio of 14 bps a year. IEMG has rallied 9.59% year to date.

iShares MSCI Emerging Markets Asia ETF(EEMA - Free Report) : This ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Emerging Markets Asia Index. The fund manages an asset size of nearly $267.54 million and an average daily trading volume of 40,018 shares. It charges an expense ratio of 49 bps a year. EEMA is up 10.43% so far this year.

PowerShares FTSE RAFI Emerging Markets Portfolio ETF(PXH - Free Report) : It is based on the FTSE RAFI Emerging Markets Index. It invests at least 90% of its assets in securities comprising the Index & ADRs. The Index tracks the performance of the largest Emerging Market equities, selected on fundamental measures: book value, cash flow, sales & dividends. The fund manages assets worth $657.70 million and an average daily trading volume of 245,959 shares. The fund charges an expense ratio of 49 bps a year. PXH has rallied 10.80% year-to-date.

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